Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

v3.8.0.1
Fair Value Measurements
9 Months Ended
Sep. 30, 2017
Fair Value Disclosures [Abstract]  
FAIR VALUE MEASUREMENTS
FAIR VALUE MEASUREMENTS
We record fair values at an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement determined based on assumptions that market participants would use in pricing an asset or liability. We utilize a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
A summary of our investments classified as available for sale and carried at fair value, is as follows:
 
As of September 30, 2017
(In thousands)
Amortized
Cost
 
Gross
unrealized
gains in
Accumulated
OCI
 
Gross
unrealized
losses in
Accumulated
OCI
 
Fair
value
Common stock investments, available for sale
$
2,048

 
$
1,308

 
$
(248
)
 
$
3,108

Total assets
$
2,048

 
$
1,308

 
$
(248
)
 
$
3,108

 
As of December 31, 2016
(In thousands)
Amortized
Cost
 
Gross
unrealized
gains in
Accumulated
OCI
 
Gross
unrealized
losses in
Accumulated
OCI
 
Fair
value
Common stock investments, available for sale
$
3,409

 
$
1,313

 
$
(194
)
 
$
4,528

Total assets
$
3,409

 
$
1,313

 
$
(194
)
 
$
4,528


Any future fluctuation in fair value related to our available for sale investments that is judged to be temporary, and any recoveries of previous temporary write-downs, will be recorded in Accumulated other comprehensive income (loss). If we determine that any future valuation adjustment was other-than-temporary, we will record a loss during the period such determination is made.
As of September 30, 2017, we have money market funds that qualify as cash equivalents, forward foreign currency exchange contracts for inventory purchases (refer to Note 9) and contingent consideration related to the acquisitions of CURNA, OPKO Diagnostics and OPKO Renal that are required to be measured at fair value on a recurring basis. In addition, in connection with our investment and our consulting agreements with Neovasc and BioCardia, we record the related Neovasc and BioCardia options at fair value as well as the warrants from COCP, Sevion, MabVax, InCellDx, Inc., Xenetic and RXi.
Our financial assets and liabilities measured at fair value on a recurring basis are as follows:
 
Fair value measurements as of September 30, 2017
(In thousands)
Quoted
prices in
active
markets for
identical
assets
(Level 1)
 
Significant
other
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
 
Total
Assets:
 
 
 
 
 
 
 
Money market funds
$
12,621

 
$

 
$

 
$
12,621

Common stock investments, available for sale
3,108

 

 

 
3,108

Common stock options/warrants

 
2,020

 

 
2,020

Total assets
$
15,729

 
$
2,020

 
$

 
$
17,749

Liabilities:
 
 
 
 
 
 
 
Forward contracts

 
264

 

 
264

Contingent consideration

 

 
40,301

 
40,301

Total liabilities
$

 
$
264

 
$
40,301

 
$
40,565

 
Fair value measurements as of December 31, 2016
(In thousands)
Quoted
prices in
active
markets for
identical
assets
(Level 1)
 
Significant
other
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
 
Total
Assets:
 
 
 
 
 
 
 
Money market funds
$
5,314

 
$

 
$

 
$
5,314

Common stock investments, available for sale
4,528

 

 

 
4,528

Common stock options/warrants

 
4,017

 

 
4,017

Forward contracts

 
39

 

 
39

Total assets
$
9,842

 
$
4,056

 
$

 
$
13,898

Liabilities:
 
 
 
 
 
 
 
Embedded conversion option
$

 
$

 
$
16,736

 
$
16,736

Contingent consideration

 

 
45,076

 
45,076

Total liabilities
$

 
$

 
$
61,812

 
$
61,812


The carrying amount and estimated fair value of our 2033 Senior Notes with the embedded conversion option, as well as the applicable fair value hierarchy tiers, are contained in the table below. The fair value of the 2033 Senior Notes is determined using a binomial lattice approach in order to estimate the fair value of the embedded derivative in the 2033 Senior Notes. Refer to Note 6.
 
September 30, 2017
(In thousands)
Carrying
Value
 
Total
Fair Value
 
Level 1
 
Level 2
 
Level 3
2033 Senior Notes
$
28,590

 
$
37,011

 
$

 
$

 
$
37,011

There have been no transfers between Level 1 and Level 2 and no transfers to or from Level 3 of the fair value hierarchy.
As of September 30, 2017 and December 31, 2016, the carrying value of our other financial instrument assets and liabilities approximates their fair value due to their short-term nature or variable rate of interest.
The following table reconciles the beginning and ending balances of our Level 3 assets and liabilities as of September 30, 2017:
 
September 30, 2017
(In thousands)
Contingent
consideration
 
Embedded
conversion
option
Balance at December 31, 2016
$
45,076

 
$
16,736

Total losses for the period:
 
 
 
Included in results of operations
(4,475
)
 
(3,185
)
Foreign currency impact
3

 

Payments
(303
)
 

Reclassification of embedded derivatives to equity

 
(13,551
)
Balance at September 30, 2017
$
40,301

 
$

The estimated fair values of our financial instruments have been determined by using available market information and what we believe to be appropriate valuation methodologies. We use the following methods and assumptions in estimating fair value:
Contingent consideration – We estimate the fair value of the contingent consideration utilizing a discounted cash flow model for the expected payments based on estimated timing and expected revenues. We use several discount rates depending on each type of contingent consideration related to OPKO Diagnostics, CURNA and OPKO Renal transactions. If estimated future sales were to decrease by 10%, the contingent consideration related to OPKO Renal, which represents the majority of our contingent consideration liability, would decrease by $2.4 million. As of September 30, 2017, of the $40.3 million of contingent consideration, $2.0 million is recorded in Accrued expenses and $38.3 million is recorded in Other long-term liabilities. As of December 31, 2016, of the $45.1 million of contingent consideration, $0.3 million is recorded in Accrued expenses and $44.8 million is recorded in Other long-term liabilities.